Rudd gives failed ETS tactic another go

Kevin Rudd
picked a fight with Australia’s resources companies over the emissions trading scheme – demonising them as the “big emitters" – as part of a broader political campaign to use the ETS to divide the opposition . . . and lost.

Now the politics of the reform plans his treasurer put forward yesterday means he is about to repeat the same strategy.

He is seeking to isolate the resource giants from smaller miners and the rest of the business community, and demonise them to households, as he makes the political question a simple one: if you stop us putting a resource rent regime on onshore assets, you will be standing in the way of lower company tax rates, higher superannuation contributions and more infrastructure spending.

This is the political challenge he will be laying down to Opposition Leader
Tony Abbott
: stand in the way of this reform and you stop reforms that go to the heart of the Coalition’s constituency – small business and retirees.

There is even the promise – waved in front of those in resources states who are agitating for the “royalties for regions" cause – that there will be a special multibillion-dollar spend on infrastructure.

But the Prime Minister will be going into this brawl with the resources sector and the opposition with his credibility badly damaged by the ETS debacle.

This will constrain his ability to counter the resource sector’s scare campaign that these changes could lead to a flight of capital.

It will also make it difficult to fend off suggestions he has a “secret" tax agenda, comprising the plethora of reforms that the Henry report has put forward and which the government has not explicitly rejected.

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There are undoubted policy merits in shifting the resources tax base to profits – and the review and the government have sought to neatly head off the double taxation brawl over state royalties and give well-designed exploration incentives.

On the cusp of a renewed boom, Treasurer
Wayne Swan
argues it is time Australia learnt to deal better with the impact of such booms and the riches they offer.

But this does not take away from the fact that resource rent taxes are not subject to dividend imputation, so the effective tax paid on resource shareholdings will jump if these reforms proceed.

The Prime Minister’s credibility problem on the secret agenda was amply demonstrated by Abbott, when he reasonably asked, whether, for example, the Prime Minister would rule out scrapping the private health insurance rebate or means-testing the childcare rebate – also review proposals.

That’s not to mention the obvious point that such a divide-and-rule political tactic backfired badly on the ETS and could do so again.

By making the whole package conditional on the resource rent tax, Rudd limits the potential for the government to promote the more voter-friendly measures such as increasing the superannuation guarantee charge.

It is such a shame that the government could not find a way of releasing the Henry review’s final report that allowed some discussion of it, without the focus being just on what the government’s immediate response to it is.

The review is a complete rethink of the way tax works in Australia – some proposals detailed at greater length, some only in passing.

But there is now virtually no chance that the report will ever be digested for what it is: a long-term blueprint.

Instead, it starts its life with key recommendations, in areas such as superannuation, rejected by the government in an election year.

Political pragmatism might be understood in the government ruling out a range of the review’s recommendations – for example land tax on the family home.

But there are many recommendations that have been ruled out upfront – such as getting rid of the luxury car tax – although they would not seem all that hard.

They also go directly to the review’s terms of reference of trying to simplify the Australian tax system.

There are a whole range of recommendations that have been left unanswered – for example, replacing a range of inefficient state taxes such as stamp duty with one single cash flow tax.

But such recommendations represent too many battles to launch just months from an ­election.

Rudd and Swan defined the resource rent reforms, the super reforms and the company tax reforms as their tax agenda for the government’s second term.

It is not just the difficult politics of these changes which mean they are a significant agenda.

The resources proposals in themselves will be massively complex to implement.

But the quandary of the government’s response is that in choosing just a couple of reforms – and knocking out so many politically contentious ones – the government leaves itself open to charges of being too timid on reform, even as it adopts measures which unleash the mother of all scare campaigns – both about what it is proposing and what it might secretly be planning to do.